- The Chinese government has recognised the need to transition the country’s growth model from debt-driven fixed-asset investment to a more sustainable household consumption model.
- The Chinese residential property market is now in a recession on key metrics and what we know today is likely being factored in by the financial markets, although the true depth of the underlying problems are unlikely to be fully apparent yet.
- In our view, China eventually faces a further tightening of domestic monetary policy if it doesn’t allow the renminbi to decline materially in value given the change in the structure of its capital account over the past few years.
- A devaluation of the renminbi will also improve the competitiveness of Chinese exports, particularly given the large devaluations of the euro and the yen during 2014.
- This will have a number of implications for the Australian equity market:- the pressure on our key commodity exports including iron ore and aluminium is unlikely to be over yet
– the Australian dollar is likely to come under further pressure which should continue to support the outlook for a number of the internationally focused domestic corporates
– China will be exporting disinflation to the world, along with Europe and Japan, and this means bond yields are likely to remain under downward pressure, and
– domestic income growth will continue to remain under pressure as the terms of trade adjusts making it more difficult for domestic focused companies, including some of our major companies at the larger end of the market (particularly those that have benefited from the duopoly/oligopoly-nature of a number of Australian industries).